Crisis Management

Crisis ManagementGet StartedWhat would you do?Cal is the manager for a successful chain of retail stores. Over the past year, business has been booming. Earnings are up and profit margins are growing. Because business has been so positive, Cal was surprised when he received a memo from the company's vice president asking him to perform a crisis audit. What did the vice president mean by a "crisis audit" and why did Cal have to worry about a crisis when business was going so well? Cal didn't have a clue where to begin.What would you do?Cal might begin by talking with colleagues who work in different areas to better understand what might go wrong in tougher times. If you were responsible for a town dam, you would certainly perform an audit of its structural integrity before a storm caused the water to rise. Likewise, it is important for Cal to perform a crisis audit when things are going well at work so that he can be better prepared should a crisis arise. One of the first steps in performing a crisis audit is to talk with many different people within the organization to gather different perspectives of what could happen. Next, Cal should conduct a SWOT analysis to determine the company's s trengths, w eaknesses, o pportunities, and t hreats for each potential crisis.In this topic, you'll learn how to prepare for, manage, and resolve crises.At Cal's company, profit margins are growing and earnings are up—so why might a crisis audit be necessary now?|Next »Get StartedTopic ObjectivesThis topic helps you to:•Avoid a crisis through planning•Prepare to manage crises you can't avoid•Recognize a crisis and contain it before it spreads even further •Resolve a crisis in the most effective way•Learn from past crises•Take care of yourself during a crisis« Previous |Next »Get StartedAbout the MentorNorman R. AugustineWhen it comes to crisis management, Norman R. Augustine is a graduate of the school of hard knocks. Having served as chairman and CEO of Lockheed Martin Corporation; director of Black & Decker, Phillips Petroleum, and Procter & Gamble; and undersecretary for the U.S. Army during the Vietnam War, Augustine has years of experience managing in turbulent and uncertain times. He is the author of Augustine's Laws (Viking Penguin, 1986) and "Managing the Crisis You Tried to Prevent" (Harvard Business Review, 1995).« Previous |Next: Learn »Learn« Previous: Get Started|Next »What Is a Crisis?September 11, 2001—How one crisis was avoidedA crisis is an event that can affect or destroy an entire organization.—Ian MitroffSeptember 11 was, without a doubt, the worst crisis on United States soil in modern times. Thousands of lives were lost in New York's World Trade Center, the Pentagon, and in rural Pennsylvania. Because the World Trade Center was home to many of the U.S.'s leading financial institutions, in addition to the terrible loss of human life in the collapse of the two towers, financial records, personal computers, servers, and back-up tape drives—and all the information they contained—were destroyed.So what happened to all the data? The mortgages? Credit information? Investment data?All but 5% of the companies involved in the attack recovered their data. Why? Most companies in the World Trade Center had learned from the 1993 attack on the towers by creating and implementing plans to regularly store critical information offsite. On September 11, 2001, almost all the data housed in the World Trade Center existed elsewhere in duplicate.« Previous |Next »Crisis DefinitionSimply put, a crisis is a change—sudden or slowly evolving—that results in an urgent problem that must be addressed immediately. A crisis can occur in many forms:•Life-threatening product defects are discovered•Computer hackers shut down a company's entire system and deny access to customers• A hard freeze destroys a region's citrus crops• A terrorist attack destroys lives and property• A key manager dies with no immediate replacementCrises are not the normal ups-and-downs of a business cycle, those recurring problems faced in the course of taking risks and exploring new avenues of opportunities.Crises are wrenching, painful events. Yet some good can come out of these difficult experiences because the learning that comes from dealing with a crisis contains within it the seeds for future success in crisis prevention, crisis management, and, in some cases, even new opportunities.« Previous |Next »Natural or company-related eventsTwo types of crises fall in this category:•Uncontrollable natural events. A natural event of catastrophic magnitude can strike unexpectedly—be it an earthquake, typhoon, tornado, hurricane, blizzard, flood, fire, or some other natural disaster. For example, earthquakes can crush buildings, destroy infrastructures, and interrupt communications.•Health and environmental disasters related to the company. Unlike natural events, some health and environment-related disasters,though not necessarily caused by the company, are directly related to the company. The company is responsible—or is perceived to be responsible—for dealing with them.Consider the following examples:o Product tampering by an outsider that can damage your company's products and harm consumers, and affect the overallimage of your product and companyo Serious product problems or defects, such as defective tires or food contamination, for which your company does bearresponsibilityo Catastrophic accidents that happen on the company's watch, such as major oil spills or radiation leakageo Environmental pollution unknowingly caused by your company in years past—for example, toxic waste with long-lastingharmful effects on wildlife and human health that has beendumped into waterways« Previous |Next »Technology breakdownsEveryone knows what it's like when the server goes down. In this information age, we are extraordinarily dependent on technology to communicate, store information, do research, buy, and sell. Business today could not function without technology.The following are some common technological problems:•Data loss: Most companies in the United States do not have data back-up plans, despite a University of Texas study finding that only 6% of companies that undergo major data loss will survive thatcrisis.•Security breaches: A 2001 survey run by the Federal Bureau of Investigation and the Computer Security Institute revealed that 85% of large companies and government agencies have detected computer breaches in the past year, and while most computer attacks come from outside, attacks from inside cause the greatest financial loss.•Communications technology: A retailer's Web site goes offline during the busiest season, stalling orders and frustratingcustomers and service representatives. A virtual team's Web site goes down, making it impossible to meet a critical deadline. Anentire phone system goes out, so that no one in a company can receive or make calls except on their mobile phones. All of these are crises generated by technological failures.•Outmoded equipment: When people work on aging equipment or on failing networks, they face a series of ongoing, minor crises every day—inefficient working conditions, difficulty meeting deadlines, lost e-mails, constant frustration—all of which can lead to a major crisis when the systems finally collapse.« Previous |Next »Economic and market forcesWith a global economy and high-speed information, markets and economies change far more rapidly than they did 20 years ago. These forces can change—or appear to change—quite swiftly.Consider the following examples:•Market swings: An unexpected spike or collapse in buying can alter predicted sales, product development, and scheduling. Even though regular market swings can make for difficult times, a majordisruption in markets results in crises.•Trends: An overall change in demand, often due to a paradigm shift, leaves backward-looking companies in the dust. The rise of thepersonal computer is an excellent example. Although it was notpredicted, it became the new paradigm. Companies that believed that mainframe technology would always be the only market were caught unaware.•Investment bubbles: Periods of rampant speculation and investment frenzy blow business opportunities out of proportion until theeconomic realities cause the bubbles to burst. The instantdeflation of portfolios, life savings, retirement incomes, and job opportunities creates crises for many.« Previous |Next »Relationship crisesAll businesses depend on people, both those within the company and those outside—business partners, vendors, and customers. What does a company do when a subcontractor in charge of security allows a serious breach at a major airport, when a vendor fails to deliver critical supplies, when an employee is caught embezzling money from a client account, when a partner is indicted, or when a major customer goes out of business? Relationship problems, even those as small as a personal conflict within a group, can lead to a serious crisis.« Previous |Next »Six stages of crisis managementAll crises—whether related to uncontrollable events, health, technology, changing markets, or relationships—have the potential to affect the company's reputation, its bottom line, its people, and, ultimately, its ability to do business. Although there is no simple formula foreliminating crises, following the six stages of crisis management can certainly make a big difference in how successfully you cope with crises.Stage 1: Avoiding the CrisisStage 2: Preparing to Manage the CrisisStage 3: Recognizing the CrisisStage 4: Containing the CrisisStage 5: Resolving the CrisisStage 6: Learning from the Crisis« Previous |Next »Avoiding the CrisisThe quiet task of avoiding crisesCrises that are handled poorly often get the greatest media attention. But we don't often hear much about crises that were prevented. Remember the Y2K bug? On New Year's Day, 2000, virtually every computer in the world made the calendar switch to the new millennium without a hitch. All those listening for trouble heard was the quiet sound of a crisis that had been prevented. For years, businesses had worked to solve the Y2K problem before it happened. And their efforts paid off.Of course, managers at every level of an organization intercede and prevent minor crises every day.• A sales representative notices that a client's name is misspelled on every page of a major sales proposal. The manager has all the copies destroyed, makes the adjustments, and has new proposalsprinted at an all-night copy center, saving the company from losinga major account.• A manager foresees a cash flow shortage, takes steps to hurry receivables, and makes sure a credit line is available at thecompany's bank should the expected cash still not come in.• A manager, when informed that a key employee is leaving, takes steps to find a replacement instead of leaving it to the last minute.All these managers are actively involved in avoiding crises. It's their job.« Previous |Next »See AlsoTips for avoiding a project crisisTips for avoiding crisesThe crisis auditMake a list of everything that could attract trouble to the business, consider the possible consequences, and estimate the cost of prevention.—Norman AugustineMost managers are already attuned to possible and probable crises and take some steps to avoid them. But you can become even more effective by preparing for crises when things are going well. The first step is to perform a crisis audit. Look for things that are going wrong now or that have the potential to go wrong in the future.A crisis audit may look like one more "To do" on your long list, but examining what has the potential to go wrong should not be just one more item to be squeezed into your already busy day but, rather, an important part of your company's or department's long-term plan.« Previous |Next »Perform a crisis auditA crisis audit involves the following steps:•Make crisis planning a part of your strategic planning. Incorporate the crisis audit into your part of the overall strategic planning process. Whether you run your own business or department, you still have to plan strategically for the future, and that planning needs to include crisis planning.•Get together and share ideas. People's perspectives about potential crises often differ greatly. No one person has all the informationa company needs. By talking to people from other areas of yourdepartment, division, or company, you may get some surprising information. Work with colleagues in your department and in other departments to analyze your situation.•Perform the SWOT analysis from a crisis perspective. One useful strategic planning tool is the SWOT analysis(s trengths, w eaknesses, o pportunities, t hreats). Conduct the analysis specifically from a crisis perspective—after all, crises often evolve from internal weaknesses or external threats.What are your organization's internal weaknesses? Where might a crisis occur in your normal business procedures? For example, are you so understaffed that if one member of the team were to leave, you couldn't function? Or is your infrastructure old and patched together? Are you having quality control problems that could lead to consumer dissatisfaction or harm?What are your most likely external threats? Which of those threats would be the most damaging to your company? Is your competition likely to introduce a radically new product, making yours obsolete?Note: Often people refuse to recognize the one major threat that looms over the company. By ignoring the reality, any constructive action that might avert or lessen the impact of the problem is left undone.For example, if your company has been successfully producing one major product line, but the managers refuse to acknowledge a new, innovative product that will eventually make your entire product line obsolete, your company very likely will not survive.•Focus on the four major crisis areas: health and environmental disasters, technological breakdowns, economic and market forces, and relationships.•Develop your crisis-risk list. In performing the crisis audit, ask yourselves two basic questions:1.What are the worst things that could go wrong?2.What are the most likely or probable crises that could occur?You can't possibly address every potential problem or crisis, and some crises simply won't touch your organization. For example, if your company is not located in an earthquake zone, don't put earthquakes on your crisis risk list. Or, if you are part of a consulting firm, you won't be worrying about a possible labor strike.Narrow the crisis-risk list by focusing on the crises that would have the worst result, would be most likely to occur, and would affect your group.« Previous |Next »Focus on the four major crisis areasA deeper understanding of the four major types of crises may make your crisis prevention process simpler. Can you identify them?Key IdeaTrying to anticipate every possible type of crisis can be overwhelming. Let's look in more detail at how you focus on the four major crises areas.•Area one: Health and environmental disasters. The health and safety of employees, consumers, the general public, and the environment are high priorities. This type of crisis can escalate from a small problem to a major crisis quickly, particularly when people within the institution try to cover it up, place blame, or minimize its importance.•Area two: Technological breakdowns. You probably already have a good idea of some of the biggest weaknesses in your company's or department's technology. Maybe it's the phone system, the server, or the Internet connection. Weaknesses in technology canprecipitate paralyzing crises if left untreated.•Area three: Economic and market forces. Economic forces and market swings can be crises with the greatest opportunities hiddeninside—but only if you are prepared. Otherwise, an unexpectedmarket swing can be damaging or even devastating.•Area four: Relationships. People are unpredictable. They may do things that you would not think possible, particularly if money or advancement is involved. Organizations with whom you have partnered for a long time may also surprise you. Consider, for example, the advertising agency whose Fortune 500 client simply closed its doors.Millions of dollars worth of business were lost. As a manager, you have to deal with numerous and diverse relationships. Look forvulnerable relationships. Be particularly aware of the one vendor,client, or computer whiz whose sudden departure could ruin your company.« Previous |Next »See AlsoSteps for conducting a crisis auditOnline Article: "Preparing for Evil"Example of an economic crisisConsider a small, health-related Internet start-up company at the height of the e-business investment bubble. The development team invested an enormous amount of money in creating content that was provided for free on the company's Web site. Little money or resources were left to develop the subscription site—the part of the site that was actually set up to make a profit. The company was following the model of otherWeb-development companies at the time—giving away most of their content for free. And many of these companies went out of business, the ultimate business crisis! Why did this happen? The tiny start-up might have failed anyway, but by following what everyone else was doing without questioning the business fundamentals, they guaranteed it. They ignored how they were going to make a profit once the venture capital money ran out.« Previous |Next »Preparing to Manage the Crisis Always be preparedIn business, creating a contingency plan means making as many decisions as you can before the crisis occurs, so that your energies can go intohandling the crisis effectively when it does occur. Many of these tasks are fairly easy to do when things are going well, but difficult and stressful to do in the middle of a crisis.However, just as a hospital arranges for a standby generator in case power goes out during surgery, you need back-up plans for the set of crises you have identified as the ones your company or department must expect and prepare for.« Previous |Next »Personal InsightsManaging through a crisisPreparing to Manage the CrisisAlways be preparedManaging through a crisisPersonal InsightWe also learned a lot about managing under crisis and I think 2002-2003 was the first business cycle in the electrical utility industry ever, and many of us learned a lot during that period. One of the things we learned about managing under crisis was firstly to stay calm. Secondly, don't look back. Figure out what you have to do, commit to doing it and be accountable for putting in place the strategies that got you where you are. This could be particularly painful. We had to cut our dividend, for example, by 50 percent. The subsequent shareowner meeting in 2003 was not a very pleasant experience. We had people standing up and screaming at the management team, calling us names which I won't repeat or referring to certain lineages which I also won't repeat. But that's to be expected; you learn the depths of people's emotions about their investments. It also makes you aware that you've been entrusted with their capital, and you've got to produce a return on that. I'm very happy to say that we took a number of steps following 2002. We shed some non-productive assets and we are continuing to shed those assets, and near the end of 2005, our return on invested capital was higher than it has ever been.Even with the decline in 2002, as I look back over the last five years our total return to shareowners has been almost twice that of the S&P 500 and it has also exceeded the S&P utility index. You learn a lot of things in the middle of a crisis.You learn a lot about yourself and your management team in the middle of a crisis. Those who you thought you could depend upon you learn that you can't, while people you thought were strong turn out to be less strong. These are great learning experiences and I think it helps you build stronger teams as you go forward. You learn that you have to make tough decisions quickly. You also learn that you have to figure out new ways to motivate people when your standard economic motivations are no longer there. You have to start to suggest to them that they are part of a resurrection program; they're building something of which ultimately they will be proud.As a leader you must be prepared for the possibility of a crisis befalling your sector or business. If this happens, stay calm, lead with strength and clarity, and explain your solutions to your stakeholders—however difficult this might be.Erroll Davis, Jr.Former Chairman, Alliant Energy CorporationErroll Davis, Jr. is the former Chairman of Alliant Energy, the company formed in 1998 through the merger of the three energy service providers WPL Holdings, IES Industries and Interstate Power.Mr. Davis, Jr. has worked in the energy industry for over 25 years. He joined WP&L in 1978, became Chief Executive ten years later and was also President until 1998.Following the merger in 1998 Mr. Davis, Jr. became President and Chief Executive of Alliant Energy. He stayed in the role of Chief Executive until June 2005, and now remains as Chairman of the company.Mr. Davis, Jr. also served as Chief Executive Officer of AER and IP&L (or their predecessor companies) following the merger.Mr. Davis, Jr. stepped down as Chairman of Alliant Energy in 2006. He is on the board of BP, PPG Industries Inc., Union Pacific Corporation, Electric Power Research Institute and the Edison Electric Institute.« Previous |Next »Recognize the risksConsider a major investment company that had only one line of business—helping individual investors buy and sell stocks. When the investment market was at its peak, this company did a booming business. It poured its profits into expanding its business by hiring more people and opening more offices. But when the economy stalled and individual investors stopped buying, the company had no other sources of revenue. The company's stock dropped and they were forced to make huge layoffs which affected everyone in the organization. By exploring other sources of revenue, and investing some of its profits in those opportunities—and by doing some "what-ifs" about their rate of growth—the company may have lessened some effects of the disaster. Of course, some things are clear in hindsight, but important lessons are all around.Use the results of your crisis audit as a basis from which to brainstorm potential crises. Question basic assumptions about your business—both the present, and the future. What assumptions do you have that might not be true? Ask yourself, "What would happen if people stopped buying our best-selling product?" or "What if demand for our product is so huge that we can't fill our orders?" It's important to do this as a group. Other people can provide a valuable perspective on each other's closely held assumptions. And finally ask, "How would this impact our group?"Once you've determined what crises you need to plan for, consider ways to minimize these risks.« Previous |Next »ActivityCrisis warning signsSee AlsoChecklist of 30 warning signs of potential trouble Preparing to Manage the CrisisRecognize the risksActivity: Crisis warning signsAnswer each of the following fourteen questions "yes" or "no." Record your answer to each question manually as you go.Consider your situation and identify whether you are currently experiencing the following.1. Is your group releasing a new product or launching new business processes?2. Are you instituting a new process?3. Has your company recently experienced a change in management?4. Are your department's or company's profits declining?5. Does your business depend on a few major customers?6. Do your business activities have the potential to harm the environment?7. Has your product or company recently experienced rapid growth?8. Is your company involved in costly litigation?9. Is your company susceptible to natural disasters?10. Is your company vulnerable to fraud?11. Does your business depend on family relationships or ownership?12. Is your company operating in a politically or economically unstable country?13. Is the general attitude of your division or group aggressive and risk-taking?14. Does your department or company use hazardous materials or manufacture hazardous products?Tally your score, giving yourself one point for each "yes" answer, and select it from the options below.0-4You answered "No" for most or all of the questions. Even though your business is not currently in a crisis situation, consider the questions to which you answered "Yes" and think about how you would respond to a related crisis situation in the future.5-14You answered "Yes" for 5 or more of the questions. Your business may have a higher-than-average probability of encountering a crisis situation. Consider the questions to which you answered "Yes" and think about how you would respond to a related crisis situation in the future.This self assessment will help you identify potential sources of risk for your company or business unit.Exit activityBrainstorm costsWith your group, brainstorm the costs for each risk you've identified. Consider everything that might go wrong, and assess the costs if it should.A risk analysis measures more than just costs in terms of money. Determine costs in terms of human health and safety, and other important factors such as ability to meet customers' demands, ability for employees to work and communicate efficiently, and the company's reputation.Prioritize those that are most pressing, and deal with them first.« Previous |Next »Come up with a crisis or contingency planSometimes, crises are unavoidable. A contingency plan will help you prepare.Key IdeaHaving selected a key what-if scenario and analyzed possible consequences, brainstorm the kinds of decisions that will have to be made. In the event of a natural disaster, employees may have to be evacuated. Second- or third-shift employees might have to be notified. If a problem arises getting a product to market, additional staff may have to be hired quickly, alternative methods of transportation might have to be lined up, or management may have to answer phones. In the event of an impending strikeby transportation workers, you might decide to call in a team of employees who drive minivans to bring some people to work and arrange for some people to work from home.As you go through this exercise, start to consider who should be making these decisions.« Previous |Next »Explore the crisis plan's possible side effectsPerform a reality check on your plan by brainstorming possible side effects.For example, when a chain of auto-repair shops wanted to boost sagging sales, management offered mechanics sales incentives. The more work they brought in, the bigger bonus they'd make. Unfortunately, some of the mechanics began recommending unnecessary repairs. Customers complained that they were being ripped off, and the chain's reputation suffered. Similarly, a factory offered incentives for every defective product turned in, but it soon turned out that some workers were deliberately damaging products in order to receive the awards. And when a pizza company promised to deliver their "pizza in 30 minutes or it's free," speeding drivers caused car accidents.You don't have to cover every eventuality, but thinking things through carefully can help prevent problems.« Previous |Next »See AlsoThe 10 worst things that could happen listScenario impact assessmentForm a crisis-management teamThe outcome of the crisis depends on the performance of the people making the decisions. The better prepared they are, the better the crisis will be handled.Determine who on your team will:•Be involved in handling each aspect of the crisis•Make what kinds of decisions。